Market Integration in Nordic Online Retail Markets: Do Cross‐Border Transaction Costs Still Matter?

ABSTRACT If online retail markets are integrated, in that cost shocks in one country also affect pricing in other countries, asymmetric shocks to any one country in the region will spill over to neighboring countries as well. Using web‐scraped product‐level prices from a group of retail firms selling identical products in at least two of the four Nordic markets under study, we investigate if national markets are segmented at the borders. Contrary to previous studies, we use differences in product characteristics to divide the data into products that are easily transported across borders and those that are not. At the extreme end of the transportability spectrum, we investigate market integration for four types of games for computers or game consoles that are delivered via downloads, where the cross‐border transaction costs should be close to zero. Our results show that markets for product categories where cross‐border transaction costs are high are also segmented at the border, while markets for product categories that can easily be traded and transported between countries are not. As such, cross‐border transaction costs still matter for market segmentation, but only for the subset of products where such costs are high.